How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding The Allstate Corporation (NYSE:ALL) and determine whether hedge funds had an edge regarding this stock.
The Allstate Corporation (NYSE:ALL) investors should be aware of an increase in hedge fund sentiment of late. The Allstate Corporation (NYSE:ALL) was in 46 hedge funds’ portfolios at the end of June. The all time high for this statistics is 48. There were 43 hedge funds in our database with ALL positions at the end of the first quarter. Our calculations also showed that ALL isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we’re going to review the new hedge fund action regarding The Allstate Corporation (NYSE:ALL).
What have hedge funds been doing with The Allstate Corporation (NYSE:ALL)?
Heading into the third quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from one quarter earlier. On the other hand, there were a total of 37 hedge funds with a bullish position in ALL a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of The Allstate Corporation (NYSE:ALL), with a stake worth $440.8 million reported as of the end of September. Trailing AQR Capital Management was Citadel Investment Group, which amassed a stake valued at $322.3 million. Viking Global, GLG Partners, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Prana Capital Management allocated the biggest weight to The Allstate Corporation (NYSE:ALL), around 5.5% of its 13F portfolio. McKinley Capital Management is also relatively very bullish on the stock, setting aside 0.87 percent of its 13F equity portfolio to ALL.
As industrywide interest jumped, specific money managers have been driving this bullishness. Viking Global, managed by Andreas Halvorsen, established the largest position in The Allstate Corporation (NYSE:ALL). Viking Global had $171.6 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also initiated a $5.1 million position during the quarter. The other funds with brand new ALL positions are Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, Paul Tudor Jones’s Tudor Investment Corp, and Alec Litowitz and Ross Laser’s Magnetar Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Allstate Corporation (NYSE:ALL) but similarly valued. We will take a look at Match Group, Inc. (NASDAQ:MTCH), Ross Stores, Inc. (NASDAQ:ROST), Dow Inc. (NYSE:DOW), KLA Corporation (NASDAQ:KLAC), ICICI Bank Limited (NYSE:IBN), IHS Markit Ltd. (NASDAQ:INFO), and Canadian Imperial Bank of Commerce (NYSE:CM). All of these stocks’ market caps resemble ALL’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $794 million. That figure was $1452 million in ALL’s case. Ross Stores, Inc. (NASDAQ:ROST) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 6 bullish hedge fund positions. The Allstate Corporation (NYSE:ALL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ALL is 82.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately ALL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ALL were disappointed as the stock returned -3.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.